Economists React: China’s Lending, Investment Slow

Banks in China made fewer loans in July after a sharp increase in June.

Bloomberg News

Accustomed to vigilantly watching for signs of excessive debt, observers of China’s economy got a shock when July’s statistics came out Wednesday: the lowest pace of credit creation since 2008. New bank lending tumbled to 385.2 billion ($62.5 billion), compared with 1.1 trillion yuan in June. Even stranger, the broader measure of credit known as total social financing fell below the level of bank loans, indicating net repayments in the less transparent “shadow banking” realm.

Meanwhile the growth of industrial production, fixed-asset investment and retail sales all also fell in July. And the housing sector remains in trouble, with sales down 10.5% on-year in the January to July period.

Economists try to make sense of all this:

Today’s monetary data should not be viewed lightly. It means that the financial system is engaging a rapid de-leveraging process, which could have significant repercussions on the real economy…Furthermore, it also suggests that the past monetary policy tweaks have not worked as intended. Although the People’s Bank of China has always been reluctant to ease, China’s macroeconomic objectives will eventually outweigh the current monetary policy inertia. We believe a reserve requirement ratio cut is imminent in order to restore confidence. – Liu Li-Gang and Zhou Hao, ANZ

In the previous month, credit data was much stronger than market expectations, which raised market speculation on the possibility of further monetary easing. Today’s credit data send a clear signal that monetary policy will remain stable. We have argued that the strong credit data in June is only temporary; similarly, we think the very weak credit data in July is also temporary…Given the shift in monetary policy operation framework, and the high monthly volatility, it is important for the central bank to improve policy communication and transparency of its policy implementation. – Haibin Zhu, J.P. Morgan

July’s economic numbers were all lower than market expected, indicating pace of recovery was still mild. We believe more measures are still needed from the government to ensure steady economic growth… The central bank will stay with targeted easing and will use rediscounting, relending and pledged supplementary lending to pump more liquidity to commercial banks to support selected industries, as guided by the government. We also expect to see an improvement of new loans in August. – Fan Zhang, CIMB

The real activity data released today suggests that, after a modest pick-up in economic growth in May and June driven by policy support and somewhat better global demand, growth momentum softened again in July…We think exports will remain supportive to China’s overall growth but we do not expect much further acceleration in export growth after the pickup in the first seven months, given the unconvincing state of and outlook for global demand momentum. Domestically, we expect real-estate activity to remain subdued, in spite of the easing of restrictions on housing purchases…We expect the government to interpret such an outlook as challenging and thus to broadly maintain the policy stance it has pursued in recent months. – Louis Kuijs, RBS

Beside seasonal volatility, we think the negative surprise in the loan data reflects the downside risks to growth, such as overcapacity and the housing downturn. Recently local press has been picking up stories about banks reducing their loan exposure to some private-sector borrowers. The sharp contraction in short-term corporate lending as well as non-bank credit activity suggests that banks’ risk aversion is indeed on the rise. Meanwhile, household loans (i.e., mortgages) also saw a decline despite repeated easing efforts by local authorities. – Qu Hongbin and Julia Wang, HSBC

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